Journal Register can’t afford for legacy costs to derail Digital First progress

Journal Register filed for Chapter 11 bankruptcy protection Wednesday. Hey, aren’t these the same folks who have been touting as breakthroughs each step along the way of their fast-track digital transition?

Well, yes. Some will view the bankruptcy filing, the company’s second in three years, as evidence that Journal Register has been blowing smoke about how much digital revenue is there for the taking. And some will suggest that CEO John Paton may want to step back from his conference circuit role as avatar of the industry’s future.

Paton, not surprisingly, doesn’t see it that way. His public and in-house announcements contend that the digital transition has been going well and should continue without a course correction. The problem, he said, is legacy costs that cannot be reduced quickly enough.

In an e-mail July 17 and in subsequent conversations, Paton told me he believes many other companies face the same financial pressures. He wrote:

All newspaper companies have legacy issues to deal with. The Digital First part – concentrating on new digital product lines, processes and news culture, etc – is the easy part. The hard part is dealing with the legacy infrastructure – costs, buildings, leases, pensions and debt. All of that was incurred on a much bigger revenue base. And all of that has to get worked out.

That seemed startling to me at the time. Hadn’t Paton been saying that half-steps to digital were not working and that a massive refocus with talented people not wedded to print traditions was essential — even if it entailed drastic disruption? Hardly easy.

My read is that Paton meant what he said and will continue as a digital evangelist, in a lower key, who practices what he preaches. But this juncture shows another side of Paton. He is also a financial guy, who worked for some years as a deal-making investment banker and created his previous company, ImpreMedia, in part by assembling disparate Hispanic-targeted media businesses under a single roof.

So I don’t find it surprising that he is a congenial executive for Alden Global Capital, the hedge fund that owns Journal Register, a controlling interest in MediaNews, and Digital First, an umbrella management company for both. A related Alden company has already bid to take back control of Journal Register if it emerges from bankruptcy as planned within 90 days.

Paton’s diagnosis of cost challenges, while unwelcome in an industry struggling to find a positive business story about itself, seems to me largely on point.

Newspapers are typically half the size (in revenues) that they used to be but still comfortably profitable on an operating basis. So far, so good. But a reasonable margin on a much-reduced revenue base brings an assortment of problems.

Most obviously: Debt incurred with expensive acquisitions before the 2007 revenue crash are a ball and chain. Some papers — the Philadelphia Inquirer and the Star Tribune of Minneapolis — went into bankruptcy protection, as did chains like Tribune, Freedom and Morris. McClatchy still applies most of its earnings to paying down interest and principal on its 2006 Knight Ridder acquisition. With a round of refinancing coming around in 2013, Media General was forced this spring to sell its newspaper division to stay in business.

Pension obligations (similar to acquisitions) were taken on in better times of high profits. Not only are much smaller companies stuck now with these generous benefit packages,  investment returns have fallen drastically. Companies face a legal obligation to keep the pension plans adequately funded. Requirements for this year were eased by Congress over the summer, but that just pushes the problem ahead a year or two.

Also, newspapers typically have much larger buildings than they need now that their operations are so much smaller. A number (Philadelphia, Atlanta, Ann Arbor) have moved from showcase downtown headquarters to generic rented office space, especially if they outsource or relocate printing. Paton is the first executive I have heard to suggest this is a systemic industry problem — and that some papers may effectively be stuck where they are with long-term leases.

As is typical with bankruptcy filings, plenty of the details of what is next for Journal Register are not yet on the table. Clearly, however, the object of the exercise is to reduce debt (currently $160 million, according to Paton), bargain out of some of the pension obligations and break some leases.

To date, none of the Journal Register publications have reduced to three-day-a-week print frequency. Nor has Paton embraced digital paywalls, preferring to assemble as large an audience as possible and place his bets on the national advertising possibilities that opens.

Later this month will mark Digital First’s birthday as a company and its takeover of management of MediaNews, a much larger company than Journal Register. Digital revenue growth has been strong at these newer properties too, Paton told me. But an obvious question for another day is whether MediaNews, itself emerging from a quick bankruptcy reorganization in 2010, will need to follow the same path to shed legacy costs.

Josh Benton of the Nieman Journalism Lab, in a knowledgeable post, asks whether the bankruptcy could be a prelude to Alden and Paton trying to engineer further acquisitions or management agreements once back on their feet. Dean Singleton, who built MediaNews and remains its executive chairman, told me a year ago that one of the attractions of Alden as an investment partner was that its principals share his view that more consolidation will be needed for the industry to prosper.

Without naming names, Paton suggested in our conversations that other newspaper companies may need to seek reorganization as debt refinancing and pension liabilities hit next year. If so, he is again the industry iconoclast, out front of the pack — but on a different, largely financial issue.

Conversely if Journal Register and MediaNews do not deliver sustainable results in 2013 and beyond, while peers scrape by, expect a chorus of I-told-you-so’s — print had a lot more economic more life left in it, at least for most papers — than Paton has supposed.

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  • Anonymous

    There’s nothing here that wasn’t perfectly predictable, and how likely is it that John Paton will pull a digital rabbit out of his hat after 20 years of everyone under the newspaper industry sun trying everything they can think of and failing miserably. All that digital amounts to in the newspaper industry is camouflage as the new owners rapidly sell off goodwill, as described by Jack Shafer. So how many more decades must we bow and scrape before the digital gods in the vain hope they’ll somehow deliver us?

    And it’s funny how the journalists’ assessment of Paton’s shenanigans rarely get mentioned, since they’re the ones on the ground and in the trenches witnessing the witless destruction. For this, I refer readers to Rachel Jackson’s comments on Jim Romenesko’s blog, as well as others there. From all the evidence, blowhard Paton is all about building his own little management empire with nary a thought or care about putting out a serious product of any sort.

    Finally, we know what an all-digital newspaper looks like. No need to speculate and wonder. It’s the Seattle Post-Intelligencer. From 150 staff in print before the transition they’re down to about 20 now and are utterly irrelevant, a mere speck in the sea of online garbage.

    Man, I hope Warren Buffett is right — and I think he may be.

  • Anonymous

    There’s nothing here that wasn’t perfectly predictable, and how likely is it that John Paton will pull a digital rabbit out of his hat after 20 years of everyone under the newspaper industry sun trying everything they can think of and failing miserably. All that digital amounts to in the newspaper industry is camouflage as the new owners rapidly sell off goodwill, as described by Jack Shafer. So how many more decades must we bow and scrape before the digital gods in the vain hope they’ll somehow deliver us?

    And it’s funny how the journalists’ assessment of Paton’s shenanigans rarely get mentioned, since they’re the ones on the ground and in the trenches witnessing the witless destruction. For this, I refer readers to Rachel Jackson’s comments on Jim Romenesko’s blog, as well as others there. From all the evidence, blowhard Paton is all about building his own little management empire with nary a thought or care about putting out a serious product of any sort.

    Finally, we know what an all-digital newspaper looks like. No need to speculate and wonder. It’s the Seattle Post-Intelligencer. From 150 staff in print before the transition they’re down to about 20 now and are utterly irrelevant, a mere speck in the sea of online garbage.

    Man, I hope Warren Buffett is right — and I think he may be.

  • Anonymous

    Josh and Brian:
    Thanks for the well-thought out comments.
    Martin may be right, and I was aware of Alden’s shrinking Gannett position when I did an earlier post on Randy Smith’s enthusiasm for the stock. But I think there may be apples, oranges and kumquats here. I assume Alden sold its stake the Philadelphia papers at a loss because the investment wasn’t working out. By my calculation it sold Gannett and probably several of the others at a nice appreciation over what it paid a year or 18 months ago. But it controls MediaNews and Journal Register with its guy in charge and a bunch of initiatives in progress.
    Brian, I thought I alluded to the possibility (much discussed by me and others previously) that big percentage gains on a tiny base do not equate to digital business success — at least financially in the here and now. Good question on why J-R didn’t get cost reductions right the first time around. The pension pinch has gotten worse in the last three years. Also it was a different management and a collection of private equity investors (including Alden, as I recall) who did the first bankruptcy deal, not Paton.

  • http://www.niemanlab.org/ Joshua Benton

    Thanks for the shout out, Rick. Did you see Martin Langeveld’s piece this morning? It made me think that both of us might be being too optimistic about the possibility of further consolidation, if Alden’s actually sold off half of its newspaper assets in the past year.

    http://www.niemanlab.org/2012/09/martin-langeveld-journal-registers-bankruptcy-is-strategic-all-right-but-for-whom/

  • http://www.facebook.com/people/Brian-OConnor/586193714 Brian O’Connor

    This does highlight two big problems, as I see it: First, digital revenue is a long way off from replacing print revenue because media companies like this have such a cribbed view of what good content is. There are plenty of digital only places that simply make more money by producing better, more engaging and more focused content than local newspaper sites. The same old “Area man petitions zoning board” crap that drove away print readers isn’t engaging digital readers, no matter how much you post on Twitter, Facebook, Pinterest, or dress it up with surveys, comments, polls and slideshows and “10 Things the Zoning Board Won’t Tell You” gimmickry. (Plus, those slide shows y’all love? They produce ZERO ad views.)

    Second, if Journal Reg didn’t deal effectively with its legacy costs — which weren’t really a secret — in its first bankruptcy and restructuring, it calls into question the simple competence of the executives, especially whether they over-estimated revenue to cover those costs, or somehow under-estimated the ongoing expense of the legacy costs. If it’s the former, then the dig-first effort is missing it’s goals. If it’s the latter, then the overall financial competence is in question.